Flexibility can cost
Niche SMME financiers are far more flexible in their approach than the large banks and other lenders. For instance, they are often prepared to consider funding you, even if your loan application to banks was rejected. Another plus is that they work with you to structure the loan to suit your business needs, whereas large lenders tend to impose the terms of the loan on the borrower. However, this flexible approach can come at a cost. Niche SMME financiers can be more expensive than banks, as they need to cater for the higher risk of their investment portfolio.
This module explains what Niche SMME financiers are looking for, and it will help prepare you to make an application to the relevant lender.
What niche financiers look for
There are five crucial things that a Niche SMME financier wants to see before they will lend to a business:
Strong entrepreneurial characteristics
In interviews, consultations and site visits, they look for signs of hard work, thrift, business common sense, business knowledge, technical knowledge of the industry, and honesty and integrity in the applicant.
Niche SMME financiers don’t always want 100% cover for their loans, but they will take what they can get. They might even accept a pledge of second-hand equipment that banks won’t regard as security. In some cases, niche lenders may even be prepared to convert the debt to equity. That means that if you don’t have collateral, then they take shares in your company instead.
The viability of the business
Your financial statements must show a viable business. The forecasts must be realistic and in line with those of the industry. They are interested in evaluating the past performance of the business and will be looking for strong growth prospects as well.
Affordability of the repayments
The forecasts must show that the business can afford to repay the finance and be realistic.
A clear credit record for the business and the owners
If there have been any bad credit events, prepare a detailed, open and honest explanation for each, and proof of how they have been paid off.
Niche financiers back the jockey not the horse
At a bank, approval for loans is dependent upon the finance approval committee’s view of the documents you submit. You do not get to meet them or have the opportunity to discuss issues with them. Niche SMME financiers, on the other hand, are very keen to meet you.
Since they are prepared to consider funding applications that the banks have turned down, they would like to hear your explanations about the issues that caused the loan to be rejected. They understand that no business is perfect and difficult situations can arise despite the best planning. How you answer these questions gives them insight into your management capabilities, your integrity and so on.
Furthermore, they also want to form an opinion about you as a business owner. Essentially they look to see whether you are capable of running your business successfully, as this will be their guarantee that they will get their money back.
In short, Niche SMME financiers meet you and evaluate:
- Your knowledge of your business.
- The reasons your loan application was rejected (if applicable) and why this situation occurred.
- Your ability to manage your business and your team.
- Your leadership and vision for growth.
- Your integrity and commitment to honour a loan agreement.
The documents you submit are there to back up your discussions with the Niche SMME financier. It isn't enough to have your accountant prepare these documents and submit them, you will be expected to be able to explain each one in detail.
Here is an idea of documents that you will need to compile:
- Short company profile or a brief description of your business.
- Business plan.
- Official financial statements from the previous financial year.
- Management accounts for the period between the end of the last financial year and the present.
- Cash flow forecast that shows how and when the money will be used and the impact this will have on the business.
- Bank statements for the last 6 to 12 months.
- Shareholders' agreements (if any) and company founding documents.
- IDs and personal bank account details for owners and directors.
- Details of personal sureties that have been signed by owners and directors.
- Collateral that can be offered.
- Personal asset and liabilities statements for owners and directors.
- Copy of the tender or contract that requires operational funds.
- Details of specialised equipment to be purchased.
- Proof of payment of bad debts (in the case where a bad credit record exists).
The aim is to really know your business case and financial details inside out so that you are able to answer all the questions and show the positive impact of the finance on your business.
The business plan
Invariably niche financiers will want to see a detailed business plan. Write the plan for the people who will read it. If they can read your business plan and know exactly how the business operates, who does what to make it run and understand its past and future, then you have done a good job.
Some lenders insist that you use their template for the business plan, so if you don’t already have a business plan, check before you start developing one.
The list below shows the items usually required in a business plan:
- About the business and its products/services.
- A strengths, weaknesses, opportunities and threats (SWOT) analysis.
- Market analysis, market segments, market size.
- Marketing plan and sales acquisition plan.
- Operation and delivery plan.
- Staffing plan.
- Financial history and forecasted financial statements.
- CVs of key personnel and owners.
If you are hoping to use the finance for a major expansion, or change of direction in your business, then a formal business plan outlining these plans will also help to boost confidence.
Impact of the National Credit Act (NCA)
Only if you have business assets of less than R1 million does the NCA apply to you. This means that the lender needs to do a strict affordability test to see if the business can afford the finance.
Bear in mind that the NCA stipulates that the lender may consider the ability of the small business to use the finance to raise an income as part of its affordability test. This means that if you can clearly show how the finance will improve the revenue earned by the business, it may improve your chances of being approved for the loan.
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